Freddie Mac Reports 2004 Financial Results

MCLEAN, Va., March 31 /PRNewswire-FirstCall/ -- Freddie Mac today reported quarterly and full-year financial results for the year ended December 31, 2004.

The company reported net income of $2.8 billion in 2004, compared to $4.8 billion in 2003. Fair value of net assets attributable to common stockholders, net of tax effect, grew by $3.8 billion -- to $26.7 billion -- a 17 percent increase from year-end 2003, compared to growth of $4.6 billion, or 25 percent, in 2003. Freddie Mac's regulatory minimum capital surplus is estimated at $10.8 billion at year-end 2004, with an estimated $3.5 billion in excess of the 30-percent target surplus set by the Office of Federal Housing Enterprise Oversight (OFHEO), the company's federal safety and soundness regulator.

"Throughout 2004, and continuing today, we are making significant progress in accomplishing our top priorities: serving our mission; increasing market share; streamlining operations and seizing business opportunities; and returning to timely financial reporting," said Richard F. Syron, Freddie Mac chairman and chief executive officer. "We accomplished a great deal in 2004, and I am particularly pleased that we met our commitment to the market to publish our 2004 financial results on our announced timeline."

In 2004, Freddie Mac financed homes for more than 3.7 million families, and we have reported attaining all of our regulatory affordable housing goals for 2004. Our market share recovered to historic levels, as we forged new relationships with mortgage lenders and other key business partners.

"We are instilling in Freddie Mac a true sense of urgency to do more in 2005 to strengthen our business and serve our mission," Syron said. "While today we are operating in a challenging, lower-growth environment, we believe that Freddie Mac will continue to produce value for both our investors and America's families."

"While 2004 held some significant challenges for our company, we begin 2005 with growing momentum," said Eugene M. McQuade, Freddie Mac president and chief operating officer. "We maintained a strong balance sheet and increased our capital surplus position. We grew the fair value of net assets. We positioned ourselves to do more business with our lending customers. Our interest-rate and credit risk results remained impressive. And we took steps toward our goal of getting a better handle on our administrative expenses. We are well positioned to deliver long-term value to the market and our stockholders."

2004 SUMMARY OF FINANCIAL RESULTS

Net income was $2.8 billion for 2004, down from $4.8 billion for 2003. Diluted earnings per common share were $3.78 for 2004, down from diluted earnings per common share of $6.68 for 2003. The change in net income for 2004 was primarily due to a decrease of $4.5 billion related to our derivative instruments not in qualifying hedge accounting relationships. However, these derivatives continued to be an effective component of our risk management activities.

Net interest income was $9.1 billion in 2004, compared to $9.5 billion in 2003. Net interest yield on a fully tax equivalent basis decreased to 124 basis points in 2004 from 130 basis points in 2003. Management and guarantee income, which is a component of "Non-interest income (loss)" on the consolidated statements of income, was $1.4 billion in 2004, compared to $1.7 billion in 2003. The total management and guarantee income rate recognized in 2004 was 17.5 basis points, down compared to the 23.3 basis points recognized in 2003, primarily due to decreases in amortization of deferred fees. Non-interest income (loss), excluding management and guarantee income, totaled ($4.4) billion in 2004, compared to ($1.9) billion in 2003. The increased loss was primarily due to the aforementioned losses on derivative instruments not in qualifying hedge accounting relationships.

Non-interest expense totaled $2.4 billion in 2004, compared to $2.2 billion in 2003. Administrative expenses, which are a component of non-interest expense, totaled $1.6 billion in 2004, compared to $1.2 billion in 2003. This increase was primarily due to costs related to our financial reporting remediation activities. Our objective in 2005 is to keep administrative expenses relatively flat compared to 2004.

For 2005, we expect to report net interest income materially lower than that reported for 2004, primarily due to compression in net interest margins on our existing portfolio and lower nominal margins on floating-rate mortgage- related security purchases. However, we expect this decrease to be significantly offset by decreased losses in non-interest income (loss), assuming current forward rates are realized.

For additional details on our earnings and performance for 2004, see our Supplemental Disclosure Package, available on the Investor Relations page of our Web site at http://www.freddiemac.com/investors .

FAIR VALUE BALANCE SHEETS AT DECEMBER 31, 2004

At December 31, 2004, the fair value of net assets (net of tax effect) was $30.8 billion, a $3.5 billion, or 13 percent, increase from December 31, 2003. For the same period, the fair value of net assets attributable to common stockholders (representing the fair value balance sheet total net assets less the fair value of net assets attributable to preferred stockholders) was $26.7 billion, a $3.8 billion, or 17 percent, increase from December 31, 2003, compared to growth of $4.6 billion, or 25 percent, in 2003. The fair value of net assets attributable to common stockholders, before common dividends and capital transactions, increased by $4.6 billion, or 20 percent, from December 31, 2003, a return that exceeds our long-term expectations.

The primary contributors to the increase in fair value of net assets in 2004 were core spread income from the Retained portfolio (defined as the estimated income resulting from the spread between mortgage-related investments and debt, calculated on an option-adjusted basis), fee-based income (including guarantee fees and credit fees related to our PCs and Structured Securities) and a gain in the fair value of our guarantees related to our outstanding PCs and Structured Securities. The fair value increase also included gains resulting from tighter mortgage-to-debt option-adjusted spreads. In 2004 we made improvements to our fair value estimation methodologies, including refinements that better capture available market data relevant to determining the fair value of our debt. The implementation of these improvements resulted in net increases in the fair value of total net assets of approximately $0.6 billion (after-tax).

RISK MANAGEMENT

In 2004, our interest-rate risk remained low. For full-year 2004, Portfolio Market Value Sensitivity and duration gap averaged two percent and zero months, respectively. Our total credit losses rose slightly in 2004 but were still quite low, totaling approximately 1.1 basis points, compared to approximately 0.8 basis points for 2003. Although we expect credit losses in 2005 to increase from their recent levels, we expect credit losses to remain low relative to historic levels.

CAPITAL

We have submitted to OFHEO amended minimum capital reports for 2004, including estimates of our capital surpluses. Based on these estimates, we believe that Freddie Mac was in compliance with its regulatory capital requirements throughout the year. The estimated minimum capital surplus at December 31, 2004, as reported to OFHEO in our amended minimum capital reports, was approximately $10.8 billion. Our estimated surplus in excess of the 30 percent target surplus at December 31, 2004 was approximately $3.5 billion. We currently expect to be able to maintain a surplus over both our minimum regulatory capital requirement and the 30 percent target surplus across a wide range of market conditions.

OTHER MATTERS GSE Regulatory Oversight Legislation

Freddie Mac faces an uncertain regulatory environment in light of legislative reforms currently being discussed. Freddie Mac strongly supports enactment of regulatory oversight legislation that ensures our regulator has authority to conduct effective oversight. We believe appropriate regulatory oversight legislation would strengthen market confidence and promote the company's mission. We will continue to work with the Congress, the Administration and other interested parties toward enacting such legislation.

We cannot predict the contents, timing or prospects for enactment of any legislation. As discussed under "GSE Regulatory Oversight Legislation" in the Supplemental Disclosure Package, it is possible that resolution of the legislative issues under consideration could adversely affect our financial condition and results of our operations in future years. Potential legislative or regulatory outcomes could also cause us to lose the ability to fulfill the goals and responsibilities of our housing mission while providing adequate returns to our stockholders.

Additional Information

For more information, see the discussion in our Supplemental Disclosure Package available on the Investor Relations page of our Web site at http://www.freddiemac.com/investors .

Additional information about Freddie Mac and its business is also set forth in our Information Statement dated September 24, 2004 and related Information Statement Supplements, available on the Investor Relations page of our Web site at http://www.freddiemac.com/investors .

Announcement of Conference Call and Webcast

We will host a conference call discussing today's announcement at 8:00 a.m. Eastern Time today. Domestic investors should call 1-888-428-4480 and international investors can access the call at 651-291-5254. The conference call will be webcast live on our Web site. During the call our Chief Financial Officer, Martin F. Baumann, will be referring to a slide presentation that we have posted on the Web site this morning. You can find a link to these slides at the end of our press release on our Web site. We encourage you to have this presentation available so that you can better follow Mr. Baumann's remarks during the call. A telephone recording of this conference call will be available continuously beginning at approximately 5:00 p.m. Eastern Time on March 31, 2005 until midnight on April 14, 2005. To access this recording in the United States, call 1-800-475-6701 and use access code 774781. Outside of the United States, call 320-365-3844 and use access code 774781.

This release summarizes financial and company information for 2004. Additional materials, including financial statements and the accompanying Supplemental Disclosure Package, which provides important disclosures and analyses, are available on our Web site, at http://www.freddiemac.com/ . Freddie Mac encourages all investors and interested members of the public to review these materials for a more complete understanding of its financial results and related company disclosures.

The information in this press release and the Supplemental Disclosure Package will be included in our Information Statement Supplement dated March 31, 2005, which will be posted on the Investor Relations page of our Web site. Freddie Mac's earnings releases and other financial disclosures are also available on the Investor Relations page of our Web site.

Freddie Mac's press releases sometimes contain forward-looking statements pertaining to management's current expectations as to our future business plans, results of operations and/or financial condition. Management's expectations for the company's future necessarily involve a number of assumptions and estimates, and various factors could cause actual results to differ materially from these expectations. These assumptions and factors are discussed in our Information Statement dated September 24, 2004 and our Supplemental Disclosure Package, which are available on the Investor Relations page of our Web site at http://www.freddiemac.com/investors .

Freddie Mac is a stockholder-owned company established by Congress in 1970 to support homeownership and rental housing. Freddie Mac fulfills its mission by purchasing residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage-related securities and debt instruments in the capital markets. Over the years, Freddie Mac has made home possible for one in six homebuyers and two million renters in America.

FREDDIE MAC CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, 2004 2003 2002 (dollars in millions, except share-related amounts) Interest income Mortgage loans $4,007 $4,251 $4,290 Mortgage-related securities in the Retained portfolio 28,460 29,051 30,039 Cash and investments 3,136 3,796 4,147 Total interest income 35,603 37,098 38,476 Interest expense Short-term debt (2,908) (2,785) (4,303) Long-term debt (22,950) (22,083) (21,337) Total interest expense on debt securities (25,858) (24,868) (25,640) Due to Participation Certificate investors (708) (1,641) (1,236) Total interest expense (26,566) (26,509) (26,876) Income (expense) related to derivatives 100 (1,091) (2,075) Net interest income 9,137 9,498 9,525 Non-interest income (loss) Management and guarantee income (includes interest on Guarantee asset for Participation Certificates of $257, $244 and $242) 1,382 1,653 1,527 Gains (losses) on "Guarantee asset for Participation Certificates, at fair value" (1,135) (1,461) (2,176) Income on "Guarantee obligation for Participation Certificates" 732 925 592 Derivative gains (losses) (4,475) 39 5,302 Hedge accounting gains (losses) 743 644 187 Gains (losses) on investment activity (348) (1,114) 1,799 Gains (losses) on debt retirement (327) (1,775) (674) Resecuritization fees 159 352 276 Other income 230 493 321 Non-interest income (loss) (3,039) (244) 7,154 Non-interest expense Salaries and employee benefits (758) (624) (593) Professional services (588) (311) (155) Occupancy expense (60) (52) (42) Other administrative expenses (144) (194) (184) Total administrative expenses (1,550) (1,181) (974) (Provision) benefit for credit losses (143) 5 (122) REO operations income (expense) 3 (7) (4) Housing tax credit partnerships (281) (200) (160) Minority interests in earnings of consolidated subsidiaries (129) (157) (184) Other expenses (271) (696) (432) Non-interest expense (2,371) (2,236) (1,876) Income before income tax expense 3,727 7,018 14,803 Income tax expense (900) (2,202) (4,713) Net income $2,827 $4,816 $10,090 Preferred stock dividends and issuance costs on redeemed preferred stock (including $0, $0 and $5 of issuance costs on redeemed preferred stock) (210) (216) (239) Net income available to common stockholders $2,617 $4,600 $9,851 Basic earnings per common share $3.80 $6.69 $14.22 Diluted earnings per common share $3.78 $6.68 $14.17 Weighted average common shares outstanding (thousands) Basic 689,282 687,094 692,727 Diluted 691,521 688,675 695,116 Dividends per common share $1.20 $1.04 $0.88 FREDDIE MAC CONSOLIDATED BALANCE SHEETS December 31, December 31, 2004 2003 (dollars in millions) Assets Retained portfolio Mortgage loans: Held for investment, at amortized cost $58,852 $57,804 Reserve for losses on mortgage loans held for investment (114) (174) Held for sale, at lower of cost or market value 2,582 2,530 Mortgage loans, net of reserve 61,320 60,160 Mortgage-related securities: Available for sale, at fair value (includes $194 and $282 pledged as collateral that may be repledged) 590,461 581,326 Trading, at fair value (includes $0 and $32 pledged as collateral that may be repledged) 11,842 18,200 Participation Certificate residuals, at fair value 845 671 Total mortgage-related securities 603,148 600,197 Retained portfolio 664,468 660,357 Cash and investments Cash and cash equivalents 35,253 23,142 Investments: Mortgage-related securities: Trading, at fair value (includes $0 and $6 pledged as collateral that may be repledged) - 32,817 Participation Certificate residuals, at fair value - (5) Non-mortgage-related securities: Available for sale, at fair value 29,830 31,228 Trading, at fair value (includes $0 and $23 pledged as collateral that may be repledged) - 1,314 Total non-mortgage-related securities 29,830 32,542 Total mortgage-related and non- mortgage-related securities 29,830 65,354 Securities purchased under agreements to resell and Federal funds sold 32,197 20,582 Cash and investments 97,280 109,078 Accounts and other receivables, net 7,286 8,067 Derivative assets, at fair value 15,257 16,180 Guarantee asset for Participation Certificates, at fair value 4,516 3,686 Real estate owned, net 741 795 Other assets 5,626 5,286 Total assets $795,174 $803,449 Liabilities and stockholders' equity Debt securities, net Senior debt: Due within one year $282,303 $295,262 Due after one year 443,772 438,738 Subordinated debt, due after one year 5,622 5,613 Total debt securities, net 731,697 739,613 Due to Participation Certificate investors 13,654 13,205 Accrued interest payable 7,329 7,345 Guarantee obligation for Participation Certificates 4,065 2,904 Derivative liabilities, at fair value 226 357 Reserve for guarantee losses on Participation Certificates 150 125 Other liabilities 5,238 6,484 Total liabilities 762,359 770,033 Commitments and contingencies Minority interests in consolidated subsidiaries 1,509 1,929 Stockholders' equity Preferred stock, at redemption value 4,609 4,609 Common stock, $0.21 par value, 726,000,000 shares authorized, 725,882,280 shares issued and 690,606,185 shares and 688,573,911 shares outstanding, respectively 152 152 Additional paid-in capital 873 814 Retained earnings 30,618 28,837 Accumulated other comprehensive income (loss), (AOCI) net of taxes, related to: Available-for-sale securities 4,339 6,349 Cash flow hedge relationships (7,924) (7,837) Minimum pension liability (8) (10) Total accumulated other comprehensive income (loss), net of taxes (3,593) (1,498) Treasury stock, at cost, 35,276,095 shares and 37,308,369 shares, respectively (1,353) (1,427) Total stockholders' equity 31,306 31,487 Total liabilities and stockholders' equity $795,174 $803,449 FREDDIE MAC CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Year Ended December 31, 2004 2003 2002 Shares Amount Shares Amount Shares Amount (dollars and shares in millions) Preferred stock, at redemption value Balance, beginning of year 92 $4,609 92 $4,609 92 $4,596 Preferred stock issuances - - - - 6 300 Preferred stock redemptions - - - - (6) (287) Preferred stock, end of year 92 4,609 92 4,609 92 4,609 Common stock, par value Balance, beginning of year 726 152 726 152 726 152 Common stock, end of year 726 152 726 152 726 152 Additional paid-in capital Balance, beginning of year 814 744 671 Stock-based compensation, before tax effect of $20, $23 and $23 56 64 65 Income tax benefit from employee stock option exercises 20 16 16 Preferred stock issuance costs - - (2) Common stock issuances (17) (10) (6) Additional paid-in capital, end of year 873 814 744 Retained earnings Balance, beginning of year 28,837 24,955 15,710 Net income 2,827 4,816 10,090 Preferred stock dividends declared (210) (216) (234) Common stock dividends declared (836) (718) (611) Retained earnings, end of year 30,618 28,837 24,955 AOCI, net of taxes Balance, beginning of year (1,498) 2,340 (557) Changes in unrealized gains (losses) related to available-for-sale securities, net of reclassification adjustments (2,010) (5,868) 8,017 Changes in unrealized gains (losses) related to cash flow hedge relationships, net of reclassification adjustments (87) 2,040 (5,120) Change in minimum pension liability 2 (10) - AOCI, net of taxes, end of year (3,593) (1,498) 2,340 Treasury stock, at cost Balance, beginning of year 37 (1,427) 39 (1,470) 31 (948) Common stock issuances (2) 74 (2) 43 (1) 33 Common stock repurchases - - - - 9 (555) Treasury stock, end of year 35 (1,353) 37 (1,427) 39 (1,470) Total stockholders' equity $31,306 $31,487 $31,330 Comprehensive income Net income $2,827 $4,816 $10,090 Changes in AOCI, net of taxes, net of reclassification adjustments (2,095) (3,838) 2,897 Total comprehensive income $732 $978 $12,987